Natural Gas Weekly Update

By IBT Staff Reporter On 06/10/10 AT 3:25 PM

Overview (For the Week Ending Wednesday, June 9, 2010)

Since Wednesday, June 2, natural gas prices rose at all market locations in the lower 48 States, with increases generally ranging between 30 and 40 cents per million Btu (MMBtu). At the Henry Hub in Erath, Louisiana, the spot price rose 43 cents during the week from $4.32 to $4.75 per MMBtu.

At the New York Mercantile Exchange (NYMEX), the July 2010 contract also rose over the week, increasing about 6 percent from $4.242 per MMBtu on June 2 to $4.677 on June 9.

Working natural gas in storage increased to 2,456 billion cubic feet (Bcf) as of Friday, June 4, following an implied net injection of 99 Bcf, according to EIA's Weekly Natural Gas Storage Report.

The West Texas Intermediate (WTI) crude oil spot price rose about 2 percent during the week, from $72.88 per barrel ($12.57 per MMBtu) to $74.38 per barrel ($12.82 per MMBtu).

Natural gas prices rose across the board, continuing increases from the previous week. Most prices spiked in trading on Tuesday, before dropping off slightly on the last day of the report week. For example, the Henry Hub natural gas spot price peaked at $4.89 per MMBtu on Tuesday before ending trading yesterday at $4.75 per MMBtu. The Henry Hub price is about 33 percent higher than its year-ago level of $3.56 per MMBtu. However, the Henry Hub spot price has dropped about 22 percent since the beginning of 2010. Generally, prices were highest in the Northeast United States, ending the week at more than $5 per MMBtu at most market locations. Additionally, warmer-than-normal temperatures and transportation constraints contributed to substantial price gains in Florida and Texas.

Price gains over the last 2 weeks reflect a variety of factors. The National Oceanic and Atmospheric Administration, along with other forecasts, predict a more-active-than-normal hurricane season. EIA's Short-Term Energy Outlook (STEO) has forecast a median of 166 Bcf of shut-in natural gas production in the Federal Gulf of Mexico resulting from hurricanes. Additionally, the Department of the Interior recently issued a 6-month moratorium on deepwater drilling, and the STEO forecast reductions in natural gas output for expected losses in production will total 8 Bcf in 2010 and 74 Bcf in 2011 (see Other Market Trends). Price increases also followed last week's Weekly Natural Gas Storage Report, which indicated the implied net injection for the week was lower than market expectations.

Transportation constraints may also have helped to push prices upward. An explosion on Enterprise Product Partners pipeline in Johnson County, Texas, reduced flows in the region. The 36-inch pipeline serves suppliers in the Barnett Shale, and Enterprise's Texas deliveries to interstate markets dropped 113 million cubic feet (MMcf) per day on June 7. At the Carthage pricing point in Texas, prices rose 40 cents during the report week, from $4.23 per MMBtu to $4.63 per MMBtu. However, this increase was mostly consistent with other price increases in the United States.

Additionally, in Florida, unplanned maintenance on the Florida Gas Transmission (FGT) pipeline and hot weather led to spikes in the price of natural gas far above the rest of the lower 48 States. At the FGT Citygate pricing point, prices rose from $5.10 per MMBtu on June 2 to $7.24 per MMBtu during the report week, a net increase of $2.14 per MMBtu or 42 percent. The largest increases occurred at the end of the report week; on Monday, prices rose more than $1. Hot weather likely exacerbated the impact of the supply constraints, as temperatures in the 80s led to increased power demand for cooling. Compared with the rest of the country, the Florida price was a clear outlier, more than 50 percent above the Henry Hub price, and more than $2 above the second-highest price in the country, the Iroquois Waddington pricing point in New York (see Transportation Update).

Supply and demand were both slightly lower this week compared with last week, but higher than last year, according to BENTEK Energy LLC estimates. Total supply fell by less than 1 percent from the previous week. Compared with the same week last year, supply was up 2 percent, with a 25-percent decline in liquefied natural gas (LNG) imports year over year offsetting a 6-percent overall increase in Canadian imports. The largest year-over-year increase in Canadian imports, in percentage terms, was in the West region of the United States, where imports rose by 50 percent. Compared with the same time last year, total natural gas demand is nearly 9 percent higher, according to BENTEK estimates. The largest increase in demand for natural gas occurred in the electric power generation sector.

At the NYMEX, the price of the near-month contract generally followed the same pattern as spot prices. The July 2010 contract rose about 25 cents, from $4.424 per MMBtu to $4.677 per MMBtu. Like the Henry Hub spot price, the July contract reached its high point for the week on Tuesday, spiking at $4.808 per MMBtu. The 12-month strip (the average of prices for contracts from July 2010 to June 2011) also rose during the report week from $5.02 on June 2 to $5.20 per MMBtu yesterday. The largest price increases were at the front end of the 12-month strip, possibly reflecting expectations of shut-in production in the Gulf of Mexico resulting from hurricanes and the deepwater drilling moratorium. The prices of the contracts for the winter heating season (November 2010 through March 2011) averaged $5.48 per MMBtu yesterday. Though in absolute terms prices for the winter heating months were lower, their increases were more moderate than the price increases for this summer.

Working natural gas in storage increased to 2,456 Bcf as of Friday, June 4, according to EIA's Weekly Natural Gas Storage Report (see Storage Figure). The implied net injection was 99 Bcf, compared with last year's net injection of 109 Bcf and the 5-year (2005-2009) average of 95 Bcf for the report week. Working gas inventories are currently 28 Bcf above year-ago levels and 310 Bcf above the 5-year average level. Working gas in storage has exceeded the 5-year average for this time of year in each of the three storage regions for the last 11 weeks. Working gas stocks remain above the record levels established in 2009. However, the year-on-year storage surplus has declined in recent weeks, since peaking at 101 Bcf for the week ending April 23.

Net injections into storage exceeded the 5-year average for the week on a national basis, despite the slower-than-normal pace of injections in the East region. On a regional basis, net injections into storage for the week ending June 4 exceeded the 5-year average in the West and Producing regions by 3 and 7 Bcf, respectively. Injections in the East region were 7 Bcf below the 5-year average. Nevertheless, at 1,148 Bcf as of June 4, working gas stocks in the East region are near record-highs for this time of year, falling about 5 percent below the record levels established for the region in 2006. Significantly warmer-than-normal temperatures in the East storage region likely contributed to the below-average rate of injections in the region.

Temperatures were generally warmer than normal in most Census Divisions in the lower 48 States during the week ended June 3, generally ranging between 62 and 77 degrees. Based on the National Weather Service's degree-day data, temperatures in the lower 48 States during the week ending April 15 were, on average, about 4.3 degrees warmer than normal and last year's level (see Temperature Maps and Data). Temperatures in each of the Census Divisions east of the Rockies exceeded normal levels by about 3 to 7 degrees for the week. In contrast, temperatures in the Mountain Census Division were just 0.3 degrees above normal, and temperatures in the Pacific Census Division were 1 degree below normal.

EIA Projects Relatively Low Natural Gas Prices through Summer 2010 Followed by Natural Gas Production Declines during 2011. Natural gas spot prices at the Henry Hub are expected to average about $4.15 per MMBtu this summer, according to the May 2010 Short-Term Energy Outlook (STEO). As a result of these relatively low prices, natural gas drilling activity and production likely will decline in 2011. EIA expects that U.S. marketed production will increase by about 1.2 Bcf per day to 61.2 Bcf per day in 2010, before falling to 60.8 Bcf per day in 2011. Production declines in 2011 are expected to contribute to rising natural gas prices, as growth in the electric power and industrial sectors will contribute to relatively strong natural gas consumption. Total natural gas consumption is expected to average 64.9 Bcf per day in 2010 and 64.6 Bcf per day in 2011. Overall, natural gas spot prices at the Henry Hub are expected to increase 54 cents in 2010 compared with 2009, averaging $4.49 per MMBtu in 2010 and $5.06 per MMBtu in 2011.

Government and Industry Continue to Respond to Leaking Oil in the Gulf of Mexico. Response continues to the oil leak following the April 20 explosion aboard the Deepwater Horizon mobile offshore drilling unit. The rig was located about 50 miles southeast of Venice, Louisiana. Some of the latest facts (according to status reports from the Administration-wide response, unless where otherwise noted) include:

Last week BP lowered a containment device over the source of the leaking oil well in the Gulf. The containment device has allowed BP to capture some of the oil that is leaking. Currently, the device is capturing about 15,000 barrels per day, or 630,000 gallons per day.

On Monday the National Oceanic and Atmospheric Administration re-opened about 339 square miles of previously-closed fishing areas off the coast of Florida. The closed area now represents 32 percent of Federal Gulf of Mexico waters.

On May 28, the U.S. Department of the Interior issued a 6-month moratorium on deepwater drilling. According to Baker Hughes Incorporated data reported on June 4, the natural gas rig count fell by 20 since the week prior. The natural gas rig count in the Gulf of Mexico fell by 5, from 19 to 14; while non-Gulf rigs fell by 15. According to EIA's Short-Term Energy Outlook, cumulative reductions in output of natural gas from the deepwater Gulf of Mexico will total 8 Bcf in 2010 and 74 Bcf in 2011 because of the 6-month drilling moratorium.

Pennsylvania Regulators Ban EOG from Drilling in Response to Well Blowout. On June 3, 2010, a blowout occurred at a natural gas well owned by EOG Resources Inc. According to the Pennsylvania Department of Environmental Protection (PADEP), the incident occurred as a result of operators losing control of the well while preparing to extract natural gas after hydraulic fracturing. The well was located in the Marcellus shale, in Clearfield County, Pennsylvania. According to PADEP, natural gas and at least 35,000 gallons of drilling wastewater were released into the surrounding area for 16 hours, until EOG capped the well the following day. Subsequently, on June 7, PADEP ordered EOG to suspend its natural gas well-drilling activities, hydraulic fracturing operations, and completion or initiation of post-fracturing operations at any natural gas wells in Pennsylvania. The suspensions will remain in effect until PADEP has completed its investigation and the company has implemented necessary changes. EOG is one of the largest operators in the Marcellus shale. According to PADEP, approximately 117 of the company's 265 active wells in Pennsylvania are located in the formation. The well blowout could affect pending State legislation that would protect groundwater from contamination by strengthening regulation of hydraulic fracturing. More information is available on the PADEP's website: http://www.depweb.state.pa.us/.

EIA Releases Presentation Discussing Changes in Production Data Estimation Methodology. On June 10, 2010, EIA released a June 6 presentation to the Oklahoma Independent Petroleum Association entitled, Natural Gas Data Collection and Estimation. This presentation focused on recent changes to the estimation methodology of survey Form EIA-914, the Monthly Natural Gas Production Report. The discussion examined how EIA's natural gas production data collection has evolved over the years, as well as the primary issues prompting methodology revisions. The presentation illustrated how these changes affected Oklahoma's production data estimation. The presentation also provided an overview of EIA's data collection system.

EIA Addresses Seasonality in Natural Gas Balancing Item. On June 4, EIA released Seasonality in the Natural Gas Balancing Item: Historical Trends and Corrective Measures, which discusses efforts to minimize the difference between natural gas supply and demand estimates reported in the Natural Gas Monthly. The balancing item, or the difference between consumption and supply, has historically exhibited strong seasonal patterns. The balancing item often trends negative in the fall, indicating supply exceeds demand, and positive in the spring, indicating demand exceeds supply. EIA determined through site visits that the seasonality stems from a lag in data reporting by some local distribution companies (LDCs). In other words, the seasonality in the balancing item is driven by a number of LDCs reporting to EIA data reflecting their billing cycle, rather than the month for which EIA is seeking data. EIA plans to revise its data collection methodology and hopes to eliminate much of the seasonality from the balancing item.

Natural Gas Transportation Update

El Paso Natural Gas Company yesterday, Wednesday, June 9, announced the completion of maintenance on its Line 1300 between Roswell and Caprock, both in New Mexico. The maintenance included pipeline and valve replacement, resulting in a total loss of capacity at the pipeline's compressor station in Lincoln, New Mexico. El Paso has restored capacity through the station to its normal level of 620 MMcf per day.

Northwest Pipeline Company on Tuesday, June 8, initiated maintenance projects that will reduce capacity on its pipeline. The pipeline company plans to install a loop at its compressor station in Boise, Idaho, that will temporarily cut capacity by 110 MMcf per day to 345 MMcf per day through June 10. Engine inspections at its compressor station in Soda Springs, Idaho, will reduce capacity by 77 MMcf to 400 MMcf per day through Friday, June 11. Equipment installations are also scheduled Thursday and Friday at the Buhl and Caldwell compressor stations, both located in Idaho.

The sheriff's department in Lipscomb County, Texas, on Tuesday confirmed the explosion of a pipeline owned by DCP Midstream Partners LP near the town Darrouzett, Texas. The explosion occurred as a dirt contracting company was hauling rock from a pit located near the pipeline right-of-way. The incident, which was the second Texas pipeline explosion in 2 days, involved a 14-inch diameter pipeline primarily used for gathering purposes. DCP said that the pipeline segment has been isolated and shut in pending an investigation of the incident.

Florida Gas Transmission Company's (FGT) recent notices to customers reflect an increase in natural gas demand within the electric power sector, as summer-like heat descends on the State. For example, the pipeline company alerted customers that its flexibility to meet shipper imbalances is limited. FGT, which experiences its highest load during the summer, alerted shippers this report week that it would not allow imbalances above 20 percent. This level was further reduced to15 percent on Tuesday, June 8.

A white Fiat van rammed into pedestrians outside enjoying a late afternoon stroll on Las Ramblas in Barcelona on Thursday killing at least 13 people and leaving hundreds injured. The Islamic State group claimed responsibility for the attack.